What defines tangible personal property in a digital landscape?

by Skip Oliva June 25, 2015

Is a pixel real? Are downloads taxable? Digital goods redefine tangible personal property standards.

Video on demand

Historically, most states impose sales or use taxes on “tangible personal property.” In the broadest sense, this includes anything a person may own that is not real property (i.e., land). But the rise of Internet-based commerce has complicated matters. Is a movie you download from iTunes “tangible”? What if you just stream the same movie from Netflix? Different states have adopted different approaches to these digital goods.

In New Jersey, for example, the state collects sales tax on any music, ringtones, movies, books, or audio and video works “delivered through electronic means.” But the state does not tax video programming services, such as video-on-demand. So if you order a pay-per-view movie from your cable provider, it is not taxable, but if you buy the same movie from iTunes, it is taxable.

Many other states do not have specific laws taxing digital property but rather include such goods in the broader definition of “tangible personal property.” In some cases state legislatures have made this explicit. In others it has been left to the tax authorities and the courts to determine which digital goods are considered tangible personal property. This can lead to quite a bit of confusion. In Louisiana, for instance, the state’s Supreme Court has said tangible personal property “is synonymous with corporeal movable property,” essentially any material object you can move from one place to another. Accordingly, computer software and other downloaded content subsequently fixed in some physical form, such as on a computer’s hard drive, is subject to sales tax in Louisiana.

But what about something like video-on-demand? At least one Louisiana court thinks it is not taxable. Last December, the Louisiana Fifth Circuit Court of Appeal held a local government could not impose sales tax on a cable company’s on-demand video service, as customers could not “download, store, record, distribute, or copy” such programs in any fixed medium.

An attempt at uniformity

Streamlines Sales and Use Tax Agreement

States participating in the Streamlines Sales and Use Tax Agreement. Image courtesy www.streamlinedsalestax.org

The Streamlined Sales Tax Governing Board, a group comprised of more than 20 states, has offered a uniform definition of “digital products” for individual states to use when setting their respective tax policies. The board suggests audio-visual works, audio works, and books delivered to customers electronically should not be lumped together with tangible personal property, but defined separately as “specified digital products.” This is the approach taken by New Jersey and about a dozen other states. Note the board does not take a position on whether states should tax digital products, only that they be classified separately for reporting purposes.

Despite the board’s efforts, some states like Louisiana continue to define digital products within the confines of tangible personal property, while others have still made no attempt to separately classify such downloads at all.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info

Skip Oliva
Skip Oliva


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